TAX AUDIT GUIDELINES DE 40 (9-04) (INTERNET) docx

DE 40 (9-04) (INTERNET) CU TAX AUDIT GUIDELINES New Release DE 40 (9-04) (INTERNET) 1 TAX AUDIT GUIDELINES TABLE OF CONTENTS CHAPTER PAGE NUMBER I. AUDIT PROGRAM A. Operational Structure and Mission 1 B. FACD Mission 1 II. TAX AUDITOR AUTHORITY, DUTIES, AND RESPONSIBILITIES A. Authority 1 B. Auditor Responsibilities 4 C. Rules of Conduct 4 D. Employer Responsibilities 6 III. CASE ASSIGNMENTS A. Types of Assignments 1 B. Case Assignment Guidelines 1 C. Case Set-Up 2 D. Transferring an Assignment 3 E. Case Appointments 3 IV. DEFINITIONS AND CLASSIFICATIONS OF AUDITS A. Definition of an Audit 1 B. Classification of Audits 1 V. SUBPOENAS A. Subpoenas - Overview 1 B. Preparation and Service of a Subpoena/Subpoena Duces Tecum, DE 297 2 C. Failure to Appear 6 D. Securing Records - Financial Institutions 7 VI. PRE-AUDIT ACTIVITIES A. Planning 1 B. Books and Records to Be Examined 1 VII. ENTRANCE INTERVIEW AND ENTITY EXAMINATION A. Interview Procedures 1 B. Entity Examination/Ownership Verification Procedures 1 New Release DE 40 (9-04) (INTERNET) 2 TAX AUDIT GUIDELINES TABLE OF CONTENTS (Continued) CHAPTER PAGE NUMBER VIII. EXAMINATION OF BOOKS AND RECORDS A. Manual Scheduling Techniques 1 B. Verification of Acknowledged Payroll 4 C. Verification of Taxable Wages 4 D. PIT Verification Tests 5 E. Large Employer 6 IX. FACT GATHERING AND STATUS DETERMINATIONS A. Guidelines for Making Status Determinations 1 B. Application of Common Law Rules 2 C. Application of Statutory Employment Rules 14 D. Temporary Services and Employee Leasing Industry, CUIC Section 606.5 15 X. PIT ASSESSMENT AND ABATEMENT A. Overview 1 XI. PENALTY DETERMINATION/APPLICATION A. Penalties - Overview 1 B. Penalty Determination - CUIC Section 803 1 C. Penalty Determination - CUIC Sections 1112(a) and 1112(b) 1 D. Penalty Determination - CUIC Section 1112.5 3 E. Penalty Determination - CUIC Section 1114 5 F. Other Penalty Applications - CUIC Section 1114 7 G. Penalty Determination - CUIC Section 1117 8 H. Penalty Determination - CUIC Sections 1126, 1126.1, and 1127 8 I. Penalty Determination - CUIC Sections 1128(a) and 1128(b) 10 J. CUIC Section 1128.1 10 K. Penalty Determination - CUIC Section 1135 10 L. False Statement Penalty - CUIC Section 1142 11 M. Penalties Covering Elective Coverage and Under the Immigration Reform Act 11 New Release DE 40 (9-04) (INTERNET) 3 TAX AUDIT GUIDELINES TABLE OF CONTENTS (Continued) CHAPTER PAGE NUMBER XII. CLOSING INTERVIEW A. Closing Interview 1 B. Pre-Assessment and Post-Assessment Conferences 2 XIII. AUDIT WRITE-UP/RULING LETTERS A. Audit Report - DE 108A - Overview 1 B. Ruling Letters - Overview 2 C. Ruling Letters - Content 3 XIV. NOTICE OF ASSESSMENT A. Overview 1 B. Assessment Criteria Under CUIC Sections 1126 and 1127 1 C. Time Limitation for Making Assessments - CUIC Section 1132 2 D. Waiver of Statute of Limitations 4 E. Jeopardy Assessments, CUIC Section 1137 4 F. Issuing Estimated Assessments 7 G. Adjusting Estimated Assessments 7 H. Memorandum Assessments 8 I. Memorandum Assessments - Successor Liability 9 J. Assessments - Special Situations 9 K. Assessments - Finality 11 L. Cancellation or Adjustment of Assessments 12 M. Service of Assessments 13 XV. COMPLETING THE CASE A. DE 2026 - Wage Report Adjustment Schedule 1 XVI. CASE REVIEW A. Integrated Review System 1 XVII. WINAAP/TAS AND WORKPAPERS/SUPPORTING SCHEDULES 1 A. WinAAP - Overview 1 B. Overview - Workpapers and Supporting Documents 1 C. Windows Automated Audit Reports 2 D. Tax Accounting System 4 New Release DE 40 (9-04) (INTERNET) 4 TAX AUDIT GUIDELINES TABLE OF CONTENTS (Continued) CHAPTER PAGE NUMBER XVIII. REFUNDS AND CREDITS A. Overview 1 B. Methods of Claiming Refunds or Credits 1 C. Time Requirements For Claiming Refund or Credit 2 D. Denial of a Claim For Refund 3 E. Authorization Required For Assignment of Refunds 3 F. Protest of Contribution Rate 3 G. CUIC Section 1179.5, Petition Conversion 4 H. Overpayments/Credits Which Include Employee Contributions 5 I. Types of Evidence Required For Refund of Employee Contributions 5 J. When Refund Procedure For Erroneous Deductions is Not Required 5 K. Employee Deductions - Voluntary Plan 6 L. Special Situations 7 M. Overpayments Under CUIC Section 1176/Benefit Overpayments 8 XIX. INVESTIGATIONS A. Definition and Overview 1 B. Proof of Credit 1 C. Bankruptcy, Probate, and Assignment (BPA) Cases 2 XX. OBSTRUCTED CLAIMS A. Overview 1 B. Investigation Request (DE 1153) 2 C. Employer Protest 4 D. Reimbursable Employers 4 E. Estimating Wages 5 F. Irregular Wage Payments, DE 2026 Preparation 6 New Release DE 40 (9-04) (INTERNET) 5 TAX AUDIT GUIDELINES TABLE OF CONTENTS (Continued) CHAPTER PAGE NUMBER XXI. SPECIAL ISSUES A. Transfer of Wages/Contributions Between Accounts 1 B. Transfer of Wages/Contributions – Consolidated Returns 1 C. Reserve Account Transfer Procedures 2 D. Overview - Horizontal Unity of Enterprise 4 E. CUIC Section 991 - Application 4 F. Interstate Reciprocal Coverage Arrangement (IRCA) 5 G. Interstate Maritime Reciprocal Arrangement (IRMA) 7 H. Sole Shareholder Exclusion 8 XXII. ELECTIVE COVERAGE A. Elective Coverage 1 New Release DE 40 (9-04) (INTERNET) 1 TAX AUDIT GUIDELINES CHAPTER I AUDIT PROGRAM A. OPERATIONAL STRUCTURE AND MISSION 1. Tax Branch Mission The Tax Branch operates a fair, efficient, and effective employment tax system. We are committed to providing excellent service to employers and claimants, and to increasing voluntary compliance with employment tax laws through education, simplified reporting processes, and the promotion of fair business competition. 2. Tax Branch Structure The Tax Branch of the Employment Development Department (EDD) is comprised of five divisions: Tax Support Division (TSD), Tax Processing and Accounting Division (TPAD), Insurance Accounting Division (IAD), Collection Division (CD), and the Field Audit and Compliance Division (FACD). B. FACD Mission FACD plays an important role in supporting the mission of the Tax Branch. The mission of FACD is to operate an effective process of education, assistance, and enforcement to promote compliance within the employment tax system administered by Tax Branch. This mission is fulfilled through the administration of the following three integrated programs designed to address various levels of non-compliance found within the employer community. • Customer Service Program The Customer Service Program provides front-line advisory service to all employers throughout California. In addition, the Customer Service Program conducts new employer workshops to help educate the employer community on issues that affect their payroll reporting requirements. Within the Customer Service Program, Employment Tax Consultants provide personalized consultations to new businesses so they can avoid prolonged non-compliance, which often leads to large unplanned tax liabilities. • Audit Program The Audit Program examines all types of business entities to determine their level of compliance with the California Unemployment Insurance Code (CUIC) and works with employers to ensure long-term compliance. New Release DE 40 (9-04) (INTERNET) 2 Chapter I • Underground Economy Operations Program The Underground Economy Operations (UEO) focuses on detection of the most non-compliant employers, including those who pay unrecorded cash wages or participate in schemes to evade their tax responsibilities. 1. FACD Central Operations FACD Central Operations provides technical support to the entire division. Audit Section and Technical Support Section are located within FACD Central Operations. Audit Section consists of Product Development Group and Quality Assurance and Petition Review Group. Technical Support Section consists of Information Management Group, Research and Status Group, and Technical Training Group. New Release DE 40 (9-04) (INTERNET) 1 TAX AUDIT GUIDELINES CHAPTER II TAX AUDITOR AUTHORITY, DUTIES, AND RESPONSIBILITIES A. AUTHORITY 1. Executive Orders The Tax Branch delegations are contained in the Department’s Executive Orders. Executive Order No. 12 provides the authority for specified employees to administer oaths and issue subpoenas under the CUIC. The order provides that pursuant to the CUIC and California Government Code Sections 11180-11182, certain officers and employees are authorized to administer oaths. Within FACD, the following employees may administer oaths: • Chief, Field Audit and Compliance Division • Assistant Chief, Field Audit and Compliance Division • Chief, Central Operations, Field Audit and Compliance Division • Any employee designated as Regional Audit Program Manager, Assistant Regional Audit Program Manager, or Area Audit Manager • Chief, Underground Economy Operations • Program Manager, Customer Service, Field Audit and Compliance Division • All Tax Compliance employee's at the level of TCR or above • All Tax audit employees at the level of Tax Auditor II or above. In addition, the following division staff are authorized to issue subpoenas to compel attendance of witnesses and the production of books, papers, correspondence, memoranda, and other records: • Chief, Field Audit and Compliance Division • Chief, Underground Economy Operations • Assistant Chief, Field Audit and Compliance Division • Chief, Central Operations, Field Audit and Compliance Division • Program Manager, Customer Service, Field Audit and Compliance Division • Assistant Program Manager, Customer Service • Any Underground Economy Operations Section Chief at the Tax Administrator II level • Any Central Operations, Field Audit and Compliance Division, Section Chief, at the Tax Administrator II level. • Any manager at the level of Tax Administrator I or above designated as Audit Program Manager, Assistant Audit Program Manager, Area Audit Manager, or Supervising Tax Auditor New Release DE 40 (9-04) (INTERNET) 2 Chapter II Executive Order No. 20 provides the authority for specified employees to require records, reports, returns, and contributions from employers. The information is furnished pursuant to CUIC sections 1085-1088, 1092-1093, 13043, and 13050. The following FACD employees are authorized to require this information from employers: • Chief, Field Audit and Compliance Division. • Assistant Chief, Field Audit and Compliance Division. • Regional Audit Program Manager. • Area Audit Program Manager. • Any Tax Administrator. • Any Supervising Tax Auditor. • Any Tax Compliance Representative I or above. • Any Auditor. • Any Program Technician or Program Technician II. 2. Authority under the California Government Code The following sections of the California Government Code gives the auditor the authority to access records: • Section 11180 provides that the head of each department may make investigations and prosecute actions concerning all matters relating to the business activities and subjects under the jurisdiction of the department. This includes matters involving violations of any law or rule of the department and any such other matters as may be provided by law. • Section 11181 provides that the department head may inspect books and records, hear complaints, administer oaths, certify to all official acts, issue subpoenas, and divulge evidence of unlawful activity discovered. • Section 11182 authorizes the Director to delegate the powers conferred by the California Government Code to any officer of the Department authorized to conduct the investigation. [...]... possible records needed • Request that the employer or authorized representative be available during the audit New Release DE 40 (9-04) (INTERNET) 3 TAX AUDIT GUIDELINES CHAPTER IV DEFINITIONS AND CLASSIFICATIONS OF AUDITS A DEFINITION OF AN AUDIT 1 Definition An audit is a systematic examination and verification of a subject employer’s books and records, conducted in accordance with auditing standards... Request Audit Assignments Request audits are conducted because of an identified or suspected need to audit a specific subject employer This type of audit is normally initiated as a result of a benefit, status, or delinquency assignment New Release DE 40 (9-04) (INTERNET) 1 TAX AUDIT GUIDELINES CHAPTER V SUBPOENAS A SUBPOENAS - OVERVIEW 1 Types EDD issues administrative Subpoenas/Subpoenas Duces Tecum (DE. .. New Release DE 40 (9-04) (INTERNET) 6 TAX AUDIT GUIDELINES CHAPTER III CASE ASSIGNMENTS A TYPES OF ASSIGNMENTS • • • • • • • • • • • Determine and verify by calendar quarter the amount of taxable wages paid or payable and the amount of contributions, interest, and penalties required under the CUIC Determine if the employing unit has made the proper withholding for State personal income tax as required... representative of the decedent "J Jones, individually and doing business as Executor of the Estate of Tom Smith Decedent." New Release DE 40 (9-04) (INTERNET) 4 Chapter V 2 Identification of Records The preparer of the DE 297 should describe the books and records that are to be produced in the space provided on the form The preparer may use the records, reports, etc., listed on form DE 996D as a guide, with the... records review New Release DE 40 (9-04) (INTERNET) 9 TAX AUDIT GUIDELINES CHAPTER VI PRE -AUDIT ACTIVITIES A PLANNING It is important that the auditor take time to anticipate the types of issues or problems which might be encountered during the audit The auditor will review CUIC sections and reference materials for applicable status issues and procedures prior to conducting the audit B BOOKS AND RECORDS... employer and/or the employer’s representative(s) New Release DE 40 (9-04) (INTERNET) 1 TAX AUDIT GUIDELINES CHAPTER VIII EXAMINATION OF BOOKS AND RECORDS A MANUAL SCHEDULING TECHNIQUES 1 Background Prior to the development of the Automated Audit Program (AAP), all audit schedules were prepared manually by the auditors While the majority of audits are completed on the AAP, some assignments may still... and kinds of payroll and related records which are available for audit The auditor will determine what records the employer maintains and the payroll procedure used The accounting records maintained by businesses are so varied that it would be impossible to list and describe all of them New Release DE 40 (9-04) (INTERNET) 1 TAX AUDIT GUIDELINES CHAPTER VII ENTRANCE INTERVIEW AND ENTITY EXAMINATION A... returned to the AAO 2 Audit Appointment (DE 996C) The DE 996C informs the employer of the date and time the auditor will appear at the employer’s place of business to conduct an audit If the appointment is not convenient, the employer has the option of rescheduling New Release DE 40 (9-04) (INTERNET) 2 Chapter III 3 Form DE 996D The DE 996D lists the types of books and records that the auditor may need... forms: • Field Audit Summary (DE 107) • Audit Worksheets (DE 3637A) The DE 107 is a summary schedule documenting the wage figures that were developed and used during the audit process The supporting schedules were generally prepared using one of the six column DE 3637A forms, but could be developed using blank column pads or other paper 2 Purpose of Field Audit Summary (DE 107) The DE 107 is required... in the interpretation or application of any law relating to a tax Government Code Section 860 defines tax for purposes of 860.2 as a tax, assessment, fee, or charge New Release DE 40 (9-04) (INTERNET) 5 Chapter II D Employer Responsibilities 1 Record Keeping Requirements Title 22 of the California Code of Regulations (CCR) and the CUIC provide authority pertaining to the responsibilities of employers, . DE 40 (9-04) (INTERNET) CU TAX AUDIT GUIDELINES New Release DE 40 (9-04) (INTERNET) 1 TAX AUDIT GUIDELINES TABLE OF CONTENTS CHAPTER PAGE NUMBER I. AUDIT. Release DE 40 (9-04) (INTERNET) 1 TAX AUDIT GUIDELINES CHAPTER IV DEFINITIONS AND CLASSIFICATIONS OF AUDITS A. DEFINITION OF AN AUDIT 1. Definition An audit